Podcast Summary: "Bracing for Sticker Shock" Thoughts on the Market with Morgan Stanley | Released July 11, 2025

Introduction

In the July 11, 2025 episode of Thoughts on the Market, Morgan Stanley's Andrew Sheats and Jenna Giannelli delve into the intricate dynamics of U.S. tariffs and their unfolding impact on market prices and corporate margins. The discussion centers around the perplexing observation that, despite substantial tariff implementations, significant price increases and margin compressions have yet to materialize in official inflation data or adversely affect the resilience of stock and credit markets.

Understanding the Delayed Impact of Tariffs

Andrew Sheats opens the conversation by highlighting the core dilemma: "Where and when are tariffs going to show up in prices and MARGINS?" (00:10). Jenna Giannelli responds by pointing out the critical timing factor. Retailers had already been maintaining substantial inventories—three to four months' worth—prior to the imposition of tariffs, allowing them to absorb early tariff inflows without immediate price hikes or margin squeezes. She states, "retailers were already sitting on three to four months worth of inventory" (01:22), which helped mitigate the initial pressures from the tariffs.

Mitigation Strategies Employed by Retailers

Jenna elaborates on the multifaceted approaches retailers have adopted to counteract tariff-induced costs. These strategies include:

• Inventory Management: Utilizing pre-tariff stock to offset new costs.
• Supply Chain Adjustments: Cancelling or pausing shipments from China and shifting production to other regions.
• Cost Optimization: Negotiating better terms with vendors and adjusting the product mix to favor lower-cost items.

She emphasizes, "retailers we've just seen utilizing a range of mitigation measures" (01:22), showcasing a proactive stance in navigating the tariff landscape.

The Role of Pricing as a Last Resort

Andrew probes deeper into the possibilities of retailers exhausting all other mitigation avenues, leading to price increases as a final option: "So closer is what I would say we're likely not going to see a huge impact in 2Q, more likely as we head into 3Q and more heavily into the all-important fourth quarter holiday season" (03:53). Jenna concurs, predicting that significant pricing adjustments will emerge in the third and fourth quarters, particularly during the holiday season when higher-cost goods flow through the profit and loss statements.

Category-Specific Impacts

The discussion shifts to how different retail categories will bear the brunt of tariff-related costs. Jenna highlights that:

• Deflationary Categories: Apparel and footwear may struggle to pass on higher costs without strong brand leverage.
• Durable Goods: Sectors like home goods, sporting goods, and furniture will find it challenging to implement price hikes.
• Staples: Categories such as beauty and personal care products are expected to handle price increases more smoothly due to their non-discretionary nature.

She notes, "Where it's going to be less of an issue is in our staples universe or in what we'd put as less discretionary categories like beauty, personal care" (05:12).

Market Implications and Future Projections

Andrew connects the micro-level discussion to broader macroeconomic trends, referencing Morgan Stanley economists' forecasts that inflation—currently modest—may rise again in the latter part of the year. This resurgence in inflation could deter the Federal Reserve from cutting interest rates as initially anticipated. Jenna adds that recent tariff announcements, especially those targeting Southeast Asia, exceed management teams' expectations and could significantly impact retail earnings. She projects, "consensus expectations for calling for EBITDA in our universe to be down around 5% year over year" versus a potential "15% year over year on a gross basis" when current tariff rates fully take effect (07:50).

Recent Developments and Final Insights

Jenna points out that recent tariff rates, particularly those effective from August 1st, are harsher than what many retailers had anticipated. This escalation suggests that further earnings revisions are likely, intensifying the discrepancy between current consensus estimates and potential outcomes under the new tariff regime.

Conclusion

Andrew wraps up the discussion by underscoring the growing uncertainty in the market due to escalating tariffs and their delayed yet potentially profound impact on retail pricing and corporate margins. He highlights the delicate balance retailers must maintain between mitigating costs through various strategies and the eventual necessity of passing some costs onto consumers, which could have broader economic implications.

Jenna reiterates the significance of the upcoming quarters, especially the holiday season, as pivotal moments where tariff impacts are expected to crystallize, potentially leading to more pronounced inflationary pressures and reshaping market dynamics.

Notable Quotes:

• "Where and when are tariffs going to show up in prices and MARGINS?" — Andrew Sheats (00:10)
• "Retailers were already sitting on three to four months worth of inventory" — Jenna Giannelli (01:22)
• "retailers we've just seen utilizing a range of mitigation measures" — Jenna Giannelli (01:22)
• "this last stop it will be to try and raise price" — Jenna Giannelli (03:53)
• "consensus expectations for calling for EBITDA in our universe to be down around 5% year over year... should be down around 15% year over year" — Jenna Giannelli (07:52)

This comprehensive analysis provides valuable insights into the nuanced effects of tariffs on the retail sector, emphasizing the interplay between corporate strategies and macroeconomic trends. For investors and market enthusiasts, understanding these dynamics is crucial for anticipating future market movements and making informed decisions.